Manila, November 2024-The Asian Development Bank is on the verge of increasing its climate-related lending capacity by as much as $7.2 billion following the largest sovereign guarantees from the United States and Japan that the multilateral bank has ever received.
Through this strategic move, ADB expands its capacity to do climate project finance to be built on redistributions of risk involved in current loans-a major development in climate finance.
U.S. and Japan’s Sovereign Backing: The Game-Changer
Under the deal, the U.S. will offer a guarantee worth up to $1 billion, and Japan will retain $600 million of ADB’s existing loans. Such backing will enable ADB to mobilize much-needed resources and unlock additional lending capacity for new climate-related initiatives across Asia. These guarantees will be in place for 25 years and are likely to provide some much-needed critical finance over the next five years for many of the climate projects already underway, such as renewable energy, green infrastructure, and climate adaptation efforts.
This mechanism is important, according to Jacob Sorensen, director of partner funds for ADB: “the structure is a fantastic way of extending a multilateral development bank’s lending capacity without going through the politically difficult situation of a general capital increase.” He added this move demonstrates a change in the way MDBs are trying to shift “climate financing strategies around the mobilization of funds in innovative ways and less direct capital injections from their members.”.
Included in this new capability is a sustainable aviation fuel project in Pakistan. The project to develop jet fuel from cooking oil has an estimated cost of $90 million. For ADB to cover about 50% of funding, it is expected to provide a substantial cut for carbon emissions within the aviation sector in Pakistan. This deal for this project is expected to be concluded by November 20th, which further would solidify the commitment of ADB to sustainable development.
ADB’s move has been in tandem with the global priority as nations are preparing to reach the COP 29 summit set to take place in the Azerbaijan city of Baku. There, the main subject will be the scaling up of climate finance for developing countries, as the need to provide financing to manage climate-related change is increasing by the day. Estimation covers over $2 trillion annually by 2030 for the transition toward clean energy with the changing climate in developing countries. Uncertainty creeps through global climate commitments injected into the U.S. election, disproportionally burdening other key players, such as Europe and China, to hasten their pace in climate financing.
Climate Finance via Collaboration
ADB closely consults with others MDBs-the World Bank and the European Investment Bank-among others-in discussing a comparable strategy in climate finance. “We have been in extensive consultation with multiple other MDBs,” Sorensen confirmed, pinpointing ADB’s role in global dialogue on climate finance solutions. The World Bank, for example, recently launched a platform to pool guarantees for climate-related investments. It plans to double its annual guarantee commitments to more than $20 billion by 2030.
says Axel van Trotsenburg, Senior Managing Director at the World Bank, “Having mobilized over $10 billion in guarantees through the programme last year, 2023 is seeing strong momentum.” The World Bank model will also support and leverage ADB work in MDBs that are coalescing together to leverage their synergies on global climate actions.
Transformation Climate Finance Landscape
This increase in climate-related lending of $7.2 billion by the ADB speaks to an evolving international approach to climate financing. MDBs have become better placed, with sovereign guarantees, to take on pivotal roles in the climate transition, providing the essential funding projects need despite monstrous financial barriers. This new funding model heralds a greater collective commitment from development banks towards setting the pace for resource mobilization into climate action.
As COP29 draws near, new sources of funding emerge in response to this larger move in climate finance. There is a lot of hope among the development banks and private investors that will help bridge the gap for climate financing and thus enable developing countries to mobilize the much-needed resources needed to mitigate and adapt to climate change impacts. This will be the excellent example of collaborative work on ADB building its enlarged lending capacity model for global climate finance in years ahead.